A huge blow for dairy farmers - Fonterra has dropped its forecast farmgate milk payout to under four dollars.

LISTEN ABOVE: Prime Minister John Key speaks to Chris Lynch about the Fonterra forecast dropping

The co-op has announced it's reduced the forecast payout for the 2015/16 season from $4.15 per kilo of milk solids, to $3.90.

Chairman John Wilson admits this is the last thing farmers want to hear, in what's already a very challenging season.

Federated Farmers spokesman Andrew Hoggard said this will have a huge impact on farmers already struggling.

"Little bit surprised that it has dropped by 25 cents, I thought maybe 10 or 15 but it just goes to show how tough the world situation is at the moment."

John Key told Newstalk ZB it's another hit to the farming industry.

He said it was "beyond everybody's control, including raw commodity prices, that's all well and good but that actually doesn't pay the bankers and the bills they face."

"There are implications not just on farm but also rural communities as farmers tighten their belts."

Fonterra's forecasting its New Zealand milk production will be at least four percent lower this season than last - as farmers are already responding to falling incomes by reducing herd sizes and buying significantly less supplementary feed.

Fonterra Chief Executive Theo Spierings said a reduction in the supply available for export before the end of the year could see prices recover earlier than expected.